Analysis of the Factors Behind the Recent Fluctuation in Bitcoin Prices

In the past week, the price of Bitcoin experienced significant fluctuations, making several attempts to break through the resistance range of $24,200 to $24,300 without success. Several main factors are behind this short-term drastic price fluctuation: chain liquidations, high funding rates, a slowdown in capital inflows from a large institutional investor, and healthy adjustments in the market.

Chain liquidation and high funding rates led to market decline

On December 20, Bitcoin experienced a significant pullback at the price of $24,295 on a certain trading platform. At that time, the exchange heatmap showed a large number of sell orders above $24,000, leading the market to expect an adjustment. In the following 17 hours, the price of Bitcoin fell to a low of $21,815. This sharp decline of 10% was mainly due to a chain liquidation within major futures exchanges.

The futures market allows traders to use high leverage, with a standard leverage ratio of up to 100 times. This means that with just $1,000, one can establish a position of $100,000. The high leverage ratio brings the liquidation price closer to the trader's entry price, increasing the risk of a large number of liquidations occurring in a short period.

On December 21, as the price of Bitcoin fell below $22,000, hundreds of millions of dollars worth of long contracts were liquidated. Data shows that within 4 hours, futures contracts valued at $474 million were forcibly closed. This large-scale chain liquidation triggered more severe price fluctuations, as it forced traders to buy or sell their positions at market price within a short period of time.

The direct indicator for assessing the bias of the futures market towards long or short positions is the funding rate. Exchanges use a "trading compensation" mechanism to maintain market balance, requiring longs or shorts to pay fees based on market inclination. Between December 20 and 21, the funding rate for Bitcoin was exceptionally high, reaching as much as 0.1%. This indicates that going long on Bitcoin has become a crowded trade.

The slowdown of fund inflows from large institutional investors may trigger a healthy adjustment

An analyst from an investment bank pointed out that if the capital inflow from a certain large institutional investor slows down, it may increase the risk of Bitcoin retracement. Throughout 2020, institutional investors have been the main driving force behind the continuous rise of Bitcoin. When the demand from the largest buyers begins to weaken, the possibility of a deep adjustment increases.

However, an on-chain analyst stated that even if Bitcoin experiences adjustments due to the slowdown in institutional demand, its adjustment period may be relatively short. The CEO of a data analysis platform pointed out that although large holders selling Bitcoin on exchanges increases the risk of a pullback, the price may quickly recover after the pullback, which may be due to strong buyer demand offsetting the impact of the pullback.

The macro trend remains positive

From a macro perspective, a positive trend is that the outflow of funds from exchanges is decreasing, while the reserves of stablecoins on exchanges are increasing. This indicates two points: the number of large holders actively selling on exchanges may be decreasing; funds choosing to wait on the sidelines are beginning to re-enter the cryptocurrency market.

Investors typically store the funds obtained from selling cryptocurrencies in stablecoins, as it is more convenient to purchase other cryptocurrencies with stablecoins. Therefore, an increase in the reserves of stablecoins on exchanges indicates that investors are reinvesting their funds into Bitcoin and other major crypto assets through stablecoins.

Short-term Uncertainty Factors

In the short term, one uncertain factor in the Bitcoin price cycle is the movement of a large institutional investor. Data shows that the premium of the institutional Bitcoin trust fund has reached 41%, which means that the Bitcoin purchased by investors through this channel is 41% higher than the spot price.

As long as this high premium state continues, the risk of a sudden decrease in institutional demand for Bitcoin in the near term remains relatively low. Considering that there are no signs of a short-term decline in the current premium, the probability of a Bitcoin pullback caused by reduced capital inflow is still not high.